Prefatory Note

The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the best-preserved paper copies, scanning those copies,1 and then making the scanned versions text-searchable.2 Though a stringent quality assurance process was employed, some imperfections may remain.

Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act.

1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff.

Strictly Confidential (FR) Class II FOMC

March 17, 1994

SUMMARY AND OUTLOOK

Prepared for the Federal Open Market Committeeby the staff of the Board of Governors of the Federal Reserve System

DOMESTIC NONFINANCIAL DEVELOPMENTS

Overview

Severe weather has probably caused at least a modest loss of

income and output in the past two months. Even so. real GDP appears

to be posting a further, considerable advance this quarter, boosted

importantly by another big gain in motor vehicle production.

Utilization rates for both labor and industrial plant are estimated

to have inched still higher, by our assessment leaving only a small

margin of disinflationary slack in the economy.

The maintenance of favorable price trends is thus likely to

require an early moderation of output expansion from the average

pace of more than 3 percent of the past year. In the near term, a

step-down in motor vehicle assemblies from the high level in the

first quarter is expected to damp growth appreciably: but over

subsequent quarters, movement toward less accommodative monetary

policy is likely to be needed to hold aggregate demand on a track

consistent with containment of inflationary pressures. The staff

forecast is predicated on an assumption of a gradual rise in short-

term rates and only a partial reversal of the backup in longer term

rates that has occurred since last fall.

In broad summary, we project that real GDP growth averaging

about 2-1/2 percent in 1994-95 will be consistent with unemployment

running just above 6-1/2 percent and manufacturing capacity

utilization remaining below 83 percent. If, as we assume, inflation

expectations move down closer to the actual experience of the past

few years, labor costs will likely remain subdued and core CPI

inflation will probably be less than 3 percent (compared with just

over 3 percent in 1993). However, less favorable food and energy

price patterns are expected to cause the overall CPI to rise about 3

percent in 1994 and 1995, somewhat above the pace of 1993.

I-1

I-2

Key Assumptions

We have assumed that the federal funds rate will rise to the

same level in this projection as in the last but, in view of the

recent FOMC action, that the increase will occur more quickly. The

recent sharp runup in longer-term rates has been an even bigger

departure from our previous expectations, and the lack of a complete

explanation for this development contributes uncertainty to the

course of interest rates going forward. We are inclined to think

that emergence of a larger inflation premium, per se, can explain

relatively little of the recent rise in bond yields. It is

conceivable, however, that the surprising strength of the economy

late last year and the willingness of the Federal Reserve to tighten

in advance of clear evidence of higher inflation have persuaded

traders that real short-term rates are likely to move higher,

perhaps for longer, than they had previously assumed.

However, we think it unlikely that "fundamentals" and rational

reassessments of economic trends alone can account for the runup in

rates that has occurred. Rather, it seems probable that a good many

traders had built sizable long positions, some on a highly leveraged

basis, based more on a strategy of simply going with the prevailing

bull market trends in stocks and bonds here and abroad. As their

gains evaporated or losses began to mount, they felt pressure to cut

or to close out their positions; this process may have fed on

itself, resulting in market dynamics that led to an "overshooting."

On that interpretation, we have assumed that some reversal of the

bond yield rise will occur in coming months--as Fed policy actions

provide no major surprises and incoming economic data confirm that

activity has decelerated and inflation remains in check.

Nonetheless, we are assuming that the higher nominal long-term rates

in our current forecast also represent somewhat higher real rates.

I-3

Growth rates of M2 and M3 are expected to edge up over 1994 and

1995. This pickup, even as nominal income growth slows and short-

term interest rates and opportunity costs rise, reflects our

judgment that the pace of adjustment of household portfolios out of

M2 into capital market instruments will abate. The recent backup in

bond yields and decline in stock prices may curb appetites for these

riskier assets, as seems to be evident in the recent weakness of

inflows to stock and bond funds. A modest rise in depository

credit, as the runoff in thrift credit ends, and reduced use of

nondeposit funding should support slightly faster M3 growth. The

velocities of M2 and M3 are anticipated to continue increasing in

1994 and 1995, but at a progressively slower pace.

The staff's fiscal policy assumptions are little changed from

those in the previous Greenbook. The unified budget deficit is

projected to fall from $255 billion in FY1993 to $221 billion in

FY1994 and $207 billion in FY1995. The deficit projected for next

year has been revised up $15 billion, reflecting in part higher

interest payments associated with the changes in the outlook for

interest rates. As before, we are assuming that any enacted health

care legislation will not have material effects during the forecast

period. Similarly, the Administration's proposal for welfare reform

faces an uncertain legislative outcome, and even if passed without a

substantial delay, its budgetary effects would be only minor through

1995.

Our forecast of economic activity abroad is little changed from

that in the January Greenbook. After an increase of about 2 percent

in 1993, foreign real GDP (on an export-weighted basis) is projected

to rise 2-3/4 percent in 1994 and 3-1/2 percent in 1995. The trade-

weighted value of the dollar in terms of other G-10 currencies has

edged down since the last FOMC meeting but is anticipated to hold

I-4

steady at recent levels over the forecast period. Crude oil prices

have dropped further, and we expect the WTI spot price to average

about $15 per barrel in the first quarter, $1.50 below the fourth-

quarter level. However, growth of world demand and some production

restraint by OPEC are anticipated to push the spot price back up to

$17.50 per barrel by this summer, where it is expected to remain

through 1995.

Current-quarter Economic Activity

We are now forecasting real GDP growth of 3-1/4 percent this

quarter, still above potential but well below the elevated (and

upwardly revised) 7-1/2 percent rate of increase in the fourth

quarter. The marked step-down in growth appears to be widespread,

with significant slowing coming from goods consumption, housing,

producers' durable equipment (aside from motor vehicles), and

exports. The latter two categories were unusually strong late last

year. Based in part on the declines of orders and shipments of

nondefense capital goods excluding aircraft in January, real PDE

growth is expected to slow to a 13-1/2 percent annual rate this

quarter from the 25 percent pace reported in the fourth quarter.

With regard to trade, the surge in exports recorded last quarter is

not anticipated to recur.

Adverse weather conditions in January and February appear to

have hit consumer spending and construction especially hard. The

level of real consumption of goods is estimated to have been less

than 1/4 percentage point higher in February than in December; the

weakness appears to reflect not only the direct effects of weather

disruptions but also some softening of demand for discretionary

items as households were confronted with outsized winter heating

bills. Of course, the higher spending for electricity and natural

gas provided a significant boost to real consumption of services.

I-5

On balance, real PCE growth is expected to slow to a 2-1/2 percent

annual rate this quarter--about half the pace of the fourth quarter.

SUMMARY OF THE NEAR-TERM OUTLOOK(Percent change, at annual rates, unless otherwise noted)

1993 1994Q3 Q4 Q1 Q2

Real GDP 2.9 7.5 3.2 2.5Previous 2.9 5.9 4.0 3.0

Memo:Contribution of motor vehicle

production -0.9 2.2 1.5 -1.6Previous -0.9 2.3 0.9 -0.9

Civilian unemployment rate (percent) 6.7 6.5 6.5 6.6Previous 6.7 6.5 7.0 6.9

CPI inflation 2.0 3.1 2.1 3.6Previous 1.4 2.8 3.6 3.6

1. Values for 1993 are from the old CPS.

Construction activity, especially residential building, also

has been restrained by bad weather. Even allowing for a substantial

rebound of housing starts in March from the depressed rate in

January and February, the first-quarter average is expected to be

down noticeably from the rate in the fourth quarter. Nevertheless,

residential construction expenditures are expected to grow at close

to a 10 percent rate reflecting the increase in starts late last

1year.

In contrast to the restraining effects of weather, production

of autos and light trucks is likely to add 1-1/2 percentage points

to GDP growth in the first quarter. The step-up in production this

quarter is transitory, however, and we see it being fully reversed

in the second quarter. Motor vehicle inventories had been drawn

down to unusually low levels late last year, and part of the bulge

1. Our estimate of residential construction outlays reflects thefixed monthly pattern that BEA uses to translate single-familyhousing starts into expenditures. In fact, the actual rate ofprogress on starts may have been retarded by inclement weather.

I-6

in production is being used to bring stocks back into a more normal

alignment with sales. (This rebuilding of stocks more than explains

the 3/4-percentage-point contribution that overall inventory

accumulation is expected to make to GDP growth this quarter.) Motor

vehicle production is also being temporarily boosted to satisfy

fleet orders that had been delayed by earlier supply shortages.

In conjunction with the apparent continued above-trend growth

of GDP, resource utilization rates have risen further in recent

months. Manufacturing IP is projected to grow at an 8 percent

annual rate this quarter, boosting capacity utilization a full

percentage point to 82-1/2 percent. Labor demand appears to have

grown moderately so far this year despite the weather-related

disruptions. Although recent movements in the unemployment rate are

difficult to gauge because of some technical considerations

(discussed more fully in part 2 of the Greenbook), we estimate that

the unemployment rate fell 0.2 percentage point between December and

February when measured on a consistent basis.

Recent news on prices and wages shows no clear sign that the

reduced margin of slack has begun to generate any general inflation

pressures. In fact, the CPI in recent months has been better than

expected, and we have lowered the first-quarter projection of the

rate of increase of the CPI by 1-1/2 percentage points to about 2

percent. With regard to labor costs, as noted in the last

Greenbook, the growth rate of the employment cost index for private

industry hourly compensation remained near 3-1/2 percent (annual

rate) in the fourth quarter, and productivity growth last year is

now measured at nearly 2 percent. A slight cautionary note may be

indicated by the recent pickup in the growth rate of average hourly

earnings, but this measure of wage rates is somewhat volatile.

The Longer-run Outlook for the Economy

Growth of real GDP is projected to average 2-1/2 percent over

the next two years, 3/4 percentage point less than the rate of

growth in 1993. This slowing is more than attributable to less

rapid expansion of major interest-sensitive spending categories -

residential construction, producers' durable equipment, and consumer

durables; the stimulus from earlier declines in interest rates

should be waning, and spending is expected to be retarded by the

projected path of higher rates. Working in the opposite direction,

the restraint on growth from net exports diminishes somewhat, and

the pace of federal spending cutbacks is also projected to diminish.

Even though the trade and federal sectors are expected to exert less

drag, their continued declines do restrain overall demand relative

to potential and thereby lessen the magnitude of the increase in

interest rates needed to bring GDP growth down to potential.

Consumer spending. We expect consumption to be a neutral

factor in the forecast, with both real PCE and disposable income

growing about 2-1/4 percent per year and the saving rate averaging

24 percent. In particular, spending on consumer durables, which

advanced rapidly over the past two years, is expected to slow

markedly as stock-adjustment motives diminish and higher interest

rates exert some restraint. Moreover, forces that appear to have

boosted consumption and imparted a downward trend to the saving rate

over the past decade, such as upward movements in the ratio of

wealth to income and additional liquidity gained from mortgage

2. The quarterly pattern projected for the saving rate has someups and downs because of BEA's decision to record in the secondquarter of each year all tax payments associated with theretroactive increase in 1993 tax liabilities, which may be spreadover the next three years. Because we have assumed that the effectof these taxes on consumption is more even, the personal saving rateis projected to drop temporarily in the second quarter of 1994 and1995.

I-8

refinancings, are not expected to continue over the projection

period.

SUMMARY OF STAFF PROJECTIONS FOR 1994-95(Percent change, Q4 to Q4, unless otherwise noted)

1993 1994 1995

Real GDP 3.2 2.7 2.3Previous 2.8 3.0 2.4

Real PCE 3.3 2.3 2.2Previous 3.1 2.4 2.3

Real BFI 15.0 10.7 9.1Previous 14.7 11.5 8.7

Civilian unemployment rate (percent) 6.5 6.6 6.6Previous 6.5 6.8 6.8

1. Average for the fourth quarter. The value for 1993 is fromthe old CPS.

Residential investment. Although the surge in residential

construction at the end of 1993 has been blunted by bad weather in

January and February, we expect the "lost" starts to be made up by

the end of the second quarter. Mortgage interest rates are expected

to average higher in this Greenbook over the projection period, and

we have adjusted down somewhat our starts projection through 1995.

Nevertheless, with cash flow affordability near a twenty-year high

and with the prospects good for continued growth in employment and

incomes, housing starts are expected to run only a bit below the

1-1/2 million unit rate recorded in the fourth quarter. Even with

the anticipated leveling of starts, the projected total in each of

the next two years would be higher than that in any year since 1988,

and the expected pace of single-family starts--1-1/4 million units--

would be the highest since the late 1970s.

Business fixed investment. After an 18-1/2 percent increase in

1993, real PDE is expected to slow to a growth rate of 12-1/2

percent this year and 10 percent next year. Several factors have

I-9

contributed to the rapid advance of PDE over the past few years:

Technological change has been pushing down prices of computers and

other "high tech" equipment; declining interest rates and the strong

performance of the stock market have lowered the cost to firms of

external funds; and strong output growth has both stimulated the

need for additional capacity and, by boosting cash flow, increased

firms' ability to finance higher investment out of internal funds.

Looking ahead, only further improvements in computer technology and

accompanying declines in prices are likely to continue to sustain

PDE growth well in excess of that of GDP. This is reflected in the

projected composition of PDE growth. Business spending on office

and computing equipment is anticipated to advance about 27 percent

this year and next, whereas the rate of increase of outlays for

other types of equipment slows to 3 percent by next year.

Real investment in nonresidential structures is projected to

rise at a 5-3/4 percent annual rate over the next two years, with

healthy advances expected for most types of structures. One

exception is office construction, for which we expect spending to be

about flat over the next two years. Indications are that this

segment has finally stabilized after declining in seven of the past

eight years.

Business inventories. As noted earlier, some stockbuilding is

taking place this quarter as auto manufacturers raise their

inventories to a more normal level relative to sales. Looking

ahead, however, the logic underlying our forecast remains one in

which firms will continue efforts to reduce inventory costs, and we

thus expect the stock of nonfarm inventories to grow a bit more

slowly than sales. In the farm sector, where inventories fell in

1993 because of production losses from flood and drought, stocks are

I-10

anticipated to start increasing later this year as production

rebounds to a more normal level.

Government purchases. After a decline of 6-1/2 percent in

1993, real federal purchases are projected to fall 4 percent this

year and 2-3/4 percent next year. All of the projected decline

reflects cuts in defense spending. Consistent with OBRA-93, real

nondefense purchases are expected to be flat this year and to edge

up just slightly in 1995.

Real state and local purchases are expected to grow 2-1/2

percent both this year and in 1995--about the same as overall GDP.

Although these governmental entities still face budgetary problems,

constituents are pressing demands for increased government services,

especially in law enforcement and education. In these

circumstances, we expect that states and localities in the aggregate

will make only modest progress this year and next in reducing their

large deficits in operating and capital accounts.

Net exports. A gradual pickup in GDP growth abroad, combined

with the moderation in the growth of U.S. domestic final demand, is

expected to slow the rate of decline in real net exports. After

having widened by an amount equal to nearly 1 percent of real GDP in

1993, the deficit on real net exports is projected to widen about

2/3 percentage point of real GDP during 1994 and a bit more than 1/3

percentage point of real GDP during 1995. (A complete discussion of

these developments is contained in the International Developments

section.)

Labor markets. With output growth projected to average near

potential after the current quarter, the unemployment rate is

anticipated to level off just above 6-1/2 percent, abstracting from

technical adjustments to the quarterly pattern that result from

biases in the new household employment survey. Based on discussions

I-11

with BLS staff, we think that the measured unemployment rate from

the new survey is biased down about 1/4 percentage point in the

first quarter and will be biased up by a similar magnitude in the

3third quarter. On balance, the unemployment rate is expected to

average about 1/4 percentage point less than anticipated in the last

Greenbook and to be not significantly different from our 6-1/2

percent estimate of the NAIRU.

The growth of labor productivity in the nonfarm business sector

is now shown to have been nearly 2 percent during 1993, compared

with our estimate of trend productivity growth of a bit less than

1-1/2 percent. The above-trend growth last year is broadly

consistent with the historical relationship between labor hours and

output--that is, the level of output per hour rises above trend well

into an expansion. Growth of output per hour is projected to be

less than trend over the next two years, reflecting the typical

cyclical pattern in which the level of productivity moves back

toward its trend level as an expansion matures.

Prices and wages. On the price front, information received

since the last FOMC meeting has generally been favorable, especially

the readings on the CPI. For the current quarter, we have revised

down our forecast of the CPI excluding food and energy about 3/4

percentage point and, with energy and food prices also coming in

well below expectations, the overall CPI has been revised down 1-1/2

percentage points. In the absence of any special factors to explain

the positive price developments, we have let some of the first-

quarter improvement pass through into a lower rate of inflation for

3. The unemployment rate projection for 1995 assumes that BLSwill have corrected the technical biases in the new survey bythen. Another factor affecting the unemployment rate this year, theending of the Emergency Unemployment Compensation (EUC) program, isexpected to contribute 0.1 percentage point reduction to theunemployment rate between February and April.

I-12

1994 as a whole. However, we have not made a larger adjustment to

the inflation outlook in light of the somewhat higher level of

resource utilization.

SUMMARY OF STAFF INFLATION PROJECTIONS(Percent change, Q4 to Q4, unless otherwise noted)

1993 1994 1995

Consumer price index 2.7 3.0 3.1Previous 2.7 3.3 3.1

Excluding food and energy 3.1 2.9 2.9Previous 3.1 3.0 2.9

ECI for compensation of 1private industry workers 3.6 3.6 3.6

Previous 3.6 3.5 3.5

1. December to December.

Looking at the broader contour of the inflation projection, the

core CPI is projected to rise slightly less than 3 percent in both

1994 and 1995, compared with an increase of just above 3 percent

last year. Although the projection of this measure of inflation for

1995 is the same as in the last Greenbook, our view of the factors

shaping the contour of the inflation outlook has changed a bit. In

the last Greenbook, we thought that sufficient slack would remain in

the economy through next year to cause core inflation to continue to

edge down; this time, we appear to be starting from a little lower

level of core inflation, but it is accompanied by higher rates of

resource utilization that make further declines in inflation less

likely.

In contrast to the core CPI, inflation measured by the total

CPI is expected to increase to about 3 percent in 1994 and 1995 from

2 3/4 percent in 1993. The pickup reflects the projected firming in

crude oil prices and a faster pace of food price inflation as a

consequence of crop losses from last year's flood and drought.

I-13

ECI hourly compensation is expected to increase a bit more than

3-1/2 percent in both 1994 and 1995--about the same pace as in the

preceding two years. The projection has been raised just a tad

over that in the last Greenbook in light of the slightly tighter

state of labor markets.

Strictly Confidential (FR)Class II FOMC

STAFF PROJECTIONS OF CHANGES IN GDP, PRICES, AND UNEMPLOYMENT(Percent, annual rate) March 16, 1994

Unemploymentrate

GDP fixed-weight Consumer (level except

Nominal GDP Real GDP price index price index1

as noted)

Interval 1/28/94 3/16/94 1/28/94 3/16/94 1/28/94 3/16/94 1/28/94 3/16/94 1/28/94 3/16/94

ANNUAL

19912 3.2 3.2 -.7 -.7 4.1 4.1 4.2 4.3 6.7 6.719922 5.5 5.5 2.6 2.6 3.3 3.3 3.0 3.0 7.4 7.4

19932 5.6 5.6 2.9 3.0 3.1 3.1 3.1 3.0 6.8 6.81994 5.8 5.7 3.6 3.6 2.9 2.7 3.0 2.8 6.9 6.6

1995 4.7 4.8 2.4 2.4 2.9 3.0 3.1 3.2 6.8 6.6

QUARTERLY

1992 Q12 7.4 7.4 3.5 3.5 4.2 4.2 3.5 2.6 7.3 7.3Q22 5.7 5.7 2.8 2.8 3.4 3.4 2.9 3.5 7.5 7.5

Q32 4.6 4.6 3.4 3.4 2.5 2.5 2.9 2.9 7.5 7.5

Q42 9.2 9.2 5.7 5.7 3.1 3.1 3.2 3.5 7.3 7.3

1993 Q12 4.4 4.4 .8 .8 4.3 4.3 3.7 2.8 7.0 7.0

Q22 4.3 4.3 1.9 1.9 2.8 2.8 2.8 3.1 7.0 7.0

Q32 4.4 4.4 2.9 2.9 2.1 2.1 1.4 2.0 6.7 6.7

Q42 7.4 8.8 5.9 7.5 2.2 2.3 2.8 3.1 6.5 6.5

1994 Q1 7.2 5.7 4.0 3.2 3.7 2.9 3.6 2.1 7.0 6.5Q2 5.3 5.0 3.0 2.5 2.9 2.9 3.6 3.6 6.9 6.6Q3 4.7 5.0 2.5 2.7 2.7 2.8 3.0 3.4 6.9 6.8

Q4 4.5 4.7 2.4 2.4 2.6 2.8 2.8 3.0 6.8 6.6

1995 Q1 5.1 5.1 2.4 2.3 3.3 3.4 3.4 3.4 6.8 6.6

Q2 4.6 4.6 2.4 2.3 2.8 2.8 3.1 3.1 6.8 6.6

Q3 4.5 4.4 2.5 2.4 2.7 2.7 2.9 2.9 6.8 6.6

Q4 4.4 4.3 2.5 2.4 2.7 2.7 2.9 2.9 6.8 6.6

6.6 6.6 3.2 3.26.9 6.9 4.6 4.6

4.3 4.3 1.3 1.35.9 6.6 4.4 5.2

6.2 5.3 3.5 2.84.6 4.8 2.4 2.5

4.8 4.9 2.44.5 4.4 2.5

3.9 3.2 3.0 .5 .52.8 2.9 3.2 -.2 -.2

3.4 3.4 3.1 -.3 -.32.2 2.0 2.4 -.5 -. 5

2.9 3.6 2.8 .4 .12.8 2.9 3.2 -. 1 .0

3.2 3.2 .02.9 2.9 .0

FOUR-QUARTER4

1991 Q42 3.7 3.7 .3 .3 3.6 3.6 3.0 3.0 1.0 1.0

1992 Q42

6.7 6.7 3.9 3.9 3.3 3.3 3.1 3.1 .3 .3

1993 Q42 5.1 5.5 2.8 3.2 2.8 2.8 2.7 2.7 -. 8 -. 8

1994 Q4 5.4 5.1 3.0 2.7 3.0 2.8 3.3 3.0 .3 .1

1995 Q4 4.6 4.6 2.4 2.3 2.9 2.9 3.1 3.1 .0 .0

For all urban consumers.Actual.

Percent change from two quarters earlier; for unemployment rate, change in percentage points.

4. Percent change from four quarters earlier; for unemployment rate, change in percentage points.

TWO-QUARTER3

1992 Q22

Q42

1993 Q22

Q42

1994 Q2Q4

1995 Q2Q4

Strictly Confidential (FR)Class II FOMC

REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS,(Seasonally adjusted annual rate)

ANNUAL VALUESMarch 16, 1994

Projected

Item Unit1 1987 1988 1989 1990 1991 1992 1993 1994 1995

EXPENDITURES

Nominal GDPReal GDP

Real GDPGross domestic purchasesFinal salesPrivate dom. final purch.

Personal cons. expend.DurablesNondurablesServices

Business fixed invest.Producers' dur. equip.Nonres. structures

Res. structures

ExportsImports

Government purchasesFederal

DefenseState and local

Change in bus. invent.Nonfarm

Net exports

Nominal GDP

EMPLOYMENT AND PRODUCTION

Nonfarm payroll employ.Unemployment rate

Industrial prod. indexCapacity util. rate-mfg.

Housing startsLight Motor Vehicle SalesAuto sales in U.S.

North American prod.Other

INCOME AND SAVING

Nominal GNPNominal GNPNominal personal incomeReal disposable incomePersonal saving rate

Corp. profits, IVA&CCAdjProfit share of GNP

Federal surpl./def.State/local surpl./def.Ex. social ins. funds

PRICES AND COSTS

GDP implicit deflatorGDP fixed-wt. price indexGross domestic purchases

fixed-wt. price indexCPI

Ex. food and energy

ECI, hourly compensation2

Nonfarm business sectorOutput per hourCompensation per hourUnit labor cost

Bill. $Bill. 87$

% change

Bill. 87$

% change

Millions%

% change%

Millions

Bill. $% change

%

% change%

Bill. $

% change

4539.94540.0

4.53.92.71.9

2.1-2.61.43.7

3.02.44.4-3.1

12.6

4.7

3.33.74.52.9

26.332.7

-143.0

8.0

102.06.2

6.381.6

1.6214.84

10.247.073.18

4544.58.17.42.14.3

29.77.0

-151.840.1

-14.7

4900.44718.6

3.32.54.24.2

4.28.53.23.7

5.59.1-1.2

.9

13.53.6

.2-3.4-3.22.9

19.926.9

-104.0

7.7

105.25.5

3.283.6

1.4915.4310.637.543.10

4908.27.87.13.24.4

10.27.4

-136.638.4

-18.4

5250.84838.0

1.6.9

1.5.5

1.2-. 51.21.7

-.4-1.72.3-7.7

11.32.6

2.0-. 6-1.54.0

29.829.9

-73.7

6.0

107.95.3

-.183.1

1.3814.539.917.082.83

5546.14897.3

.2-.41.2-.1

.7-. 8-.11.7

.72.9-3.9

-15.2

6.7.4

3.32.81.53.6

5.73.2

-54.7

4.7

109.45.5

-. 281.1

1.1913.869.506.902.60

5266.8 5567.86.1 4.96.5 6.51.1 1.14.0 4.2

-6.3 2.36.9 6.8

-122.3 -163.544.8 25.1-17.5 -35.6

3.4 4.2 4.33.4 4.2 4.4

3.9 4.1 4.44.5 4.3 4.64.3 4.5 4.4

3.3 4.8 4.8

-1.4 .43.1 6.24.6 5.7

5722.94861.4

.3-.2-.3-.7

.0-.4-1.3

.9

-6.3-3.3

-12.61.6

8.44.2

-.7-3.7-7.31.5

-8.4-8.6

-19.1

3.7

108.36.7

-. 377.8

1.0112.308.396.14

2.25

5737.13.33.5.7

4.8

4.46.4

-203.47.3

-51.2

3.43.6

3.13.04.4

4.4

2.24.72.5

6038.54986.3

3.94.33.85.0

4.09.73.62.8

7.411.4-2.017.6

4.98.5

1.1.4

-1.41.6

6.52.7

-33.6

6.7

108.57.4

3.278.6

1.2012.838.386.282.11

6045.86.58.14.95.3

16.06.7

6379.45137.7

3.24.13.15.0

3.38.01.92.9

15.018.55.67.7

4.811.7

-. 5-6.5-8.93.4

15.520.9

-76.4

5.5

110.26.8

4.380.6

1.2913.898.716.741.97

6380.55.53.51.24.0

14.17.3

-276.3 -226.47.2 1.7

-52.2 -56.8

3.6 1.95.2 2.81.5 .9

6745.15322.6

2.73.32.43.7

2.32.12.12.5

10.712.45.35.6

5.09.4

.1-4.0-6.02.6

22.622.5

-107.0

5.1

112.36.6

4.182.6

1.4414.96

9.117.241.87

6741.85.05.52.34.0

1.17.4

-149.62.2

-55.1

2.42.8

2.83.02.9

3.6

7066.75449.7

2.32.72.33.1

2.22.41.92.2

9.110.06.2-.8

7.79.2

.6-2.8-4.62.5

28.025.5

-132.2

4.6

114.26.6

3.082.7

1.4415.289.237.361.87

7058.44.65.32.24.0

4.67.4

-141.37.5

-48.6

2.22.9

2.83.12.9

3.6

.8 1.23.7 3.62.9 2.3

1. Percent changes are from fourth quarter to fourth quarter. 2. Private-industry workers.

Strictly Confidential (FR)Class II FOMC

REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES(Seasonally adjusted, annual rate except as noted) March 16, 1994

1991 1992 1993

Item Unit Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

EXPENDITURES

Nominal GDPReal GDP

Real GDPGross domestic purchasesFinal salesPrivate dom. final purch.

Personal cons. expend.DurablesNondurablesServices

Business fixed invest.Producers' dur. equip.Nonres. structures

Res. structures

ExportsImports

Government purchasesFederalDefense

State and local

Change in bus. invent.Nonfarm

Net exports

Nominal GDP

EMPLOYMENT AND PRODUCTION

Nonfarm payroll employ.Unemployment ratel

Industrial prod. indexCapacity util. rate-mfg.

1

Housing startsLight Motor Vehicle Sales

Auto sales in U.S.North American prod.Other

INCOME AND SAVING

Nominal GNPNominal GNPNominal personal incomeReal disposable incomePersonal saving ratel

Corp. profits, IVA&CCAdjProfit share of GNP1

Federal govt. surpl./def.State/local surpl./def.

Ex. social ins. funds

PRICES AND COSTS

GDP implicit deflatorGDP fixed-wt. price indexGross domestic purchases

fixed-wt. price indexCPI

Ex. food and energy

ECI, hourly compensation2

Nonfarm business sectorOutput per hourCompensation per hourUnit labor cost

Bill. $Bill. 87$

% change

Bill. 87$

% change

Millions%

% change8

Millions

Bill. $% change

%

% change

Bill. $

% change

5631.74837.8

-2.4-3.6-2.7-5.4

-2.8-11.4

-3.5-. 2

-13.2-15.3-8.5

-25.5

-. 8-11.1

2.87.89.1-. 5

-17.4-18.7-21.6

2.4

108.66.5

-7.877.5

.9012.158.396.162.24

5656.11.92.1-. 44.8

7.46.5

-145.26.1

-52.5

5.05.1

3.63.05.9

4.6

5697.74855.6

1.5.8

1.91.1

1.81.61.12.2

-2.7.1

-8.71.2

19.4

11.7

1.4-. 2

-4.42.6

-22.3-26.2-13.3

4.8

108.26.7

1.077.3

1.0112.19

8.356.052.30

5710.63.94.21.94.9

1.66.5

-206.25.5

-53.1

3.23.4

2.52.43.5

4.9

5758.64872.6

1.42.4-. 41.2

1.310.4

-. 7.3

-3.85.3

-21.317.3

3.011.8

-2.0-6.9

-12.31.7

-. 9.0

-25.0

4.3

108.26.7

5.778.2

1.0412.60

8.556.252.31

5766.24.02.1-. 94.4

-12.16.2

-217.75.5

-52.9

2.93.4

3.13.04.6

4.1

5803.74879.6

.6-. 1-. 1

.2

.0-1.0-2.0

1.5

-5.1-2.2

-11.320.3

13.36.3

-4.7-14.2-19.22.2

7.110.3

-16.4

3.2

108.17.0

.378.1

1.0912.27

8.256.092.16

5815.53.55.82.24.9

24.06.5

-244.712.1

-46.5

2.62.7

3.03.33.7

4.0

1.9 2.7 .8 3.44.4 4.9 4.6 4.92.5 2.2 3.7 1.5

5908.74922.0

3.53.44.54.8

4.314.7

3.12.6

3.52.84.9

16.8

4.93.8

3.0.0

-5.55.0

-5.0-9.6

-15.2

7.4

108.17.3

.377.9

1.2412.558.406.152.25

5927.67.97.54.25.0

37.16.9

-270.26.1

-52.8

3.84.2

3.92.63.7

3.6

3.85.61.7

5991.44956.5

2.84.71.44.3

1.8.8

1.12.4

15.122.0

.321.8

-. 615.9

-1.0-3.1-5.0

.4

12.67.0

-38.0

5.7

108.47.5

5.678.7

1.1512.86

8.456.292.16

5996.34.76.23.15.3

1.86.9

-279.97.8

-51.8

2.83.4

3.33.53.6

3.2

2.84.71.8

6059.54998.2

3.43.83.74.0

4.210.7

3.03.3

3.810.2

-10.31.2

6.59.2

4.18.7

10.51.2

9.65.8

-42.5

4.6

108.67.5

.678.5

1.1912.658.246.242.00

6067.34.83.71.94.9

-36.56.1

-290.71.2

-58.3

1.22.5

3.02.93.0

3.2

3.65.92.2

6194.45068.3

5.75.45.87.1

5.613.2

7.32.9

7.611.5-2.132.8

8.85.6

-1.4-3.5-4.6

.0

8.77.5

-38.8

9.2

108.97.3

6.479.4

1.2413.268.456.432.02

6191.98.5

15.510.6

6.0

104.67.1

-264.213.5

-46.0

6261.65078.2

.82.5-. 82.5

.8-1.3-2.1

3.1

14.419.9

.51.5

-2.411.6

-6.4-16.2-21.4

.3

29.329.3

-59.9

4.4

109.47.0

5.280.1

1.1513.308.356.381.97

6262.14.6

-5.4-7.83.9

-6.66.9

-263.5.8

-58.2

6327.65102.1

1.93.13.24.4

3.410.8

2.72.1

16.619.88.1

-9.5

3.613.3

4.32.0.7

5.6

13.017.1

-75.2

4.3

110.07.0

2.380.3

1.2414.148.956.902.06

6327.14.29.35.84.4

26.37.2

-222.61.1

-57.8

3.3 3.6 2.33.1 4.3 2.8

-1.8 -. 42.9 1.94.8 2.3

1. Not at an annual rate. 2. Private-industry workers.1. Not at an annual rate. 2. Private-industry workers.

Strictly Confidential (FR)Class II FOMC

REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES(Seasonally adjusted, annual rate except as noted) March 16, 1994

Projected

1993 1994 1995

Item Units Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

EXPENDITURES

Nominal GDPReal GDP

Real GDPGross domestic purchasesFinal salesPrivate dom. final purch.

Personal cons. expend.DurablesNondurablesServices

Business fixed invest.Producers' dur. equip.Nonres. structures

Res. structures

ExportsImports

Government purchasesFederal

DefenseState and local

Change in bus. invent.Nonfarm

Net exports

Nominal GDP

EMPLOYMENT AND PRODUCTION

Nonfarm payroll employ.Unemployment rate

1

Industrial prod. indexCapacity util. rate-mfg

1

Housing startsLight Motor Vehicle Sales

Auto sales in U.S.North American prod.Other

INCOME AND SAVING

Nominal GNPNominal GNPNominal personal incomeReal disposable incomePersonal saving ratel

Corp. profits, IVA&CCAdjProfit share of GNP

1

Federal govt. surpl./def.State/local surpl./def.

Ex. social ins. funds

PRICES AND COSTS

GDP implicit deflatorGDP fixed-wt. price indexGross domestic purchases

fixed-wt. price indexCPI

Ex. food and energy

ECI, hourly compensation2

Nonfarm business sectorOutput per hourCompensation per hourUnit labor cost

Bill. $Bill. 87$

% change

Bill. 87$

% change

Millions%

% change%

Millions

Bill. $% change

%

% change

Bill. $

% change

6395.95138.3

2.93.73.45.1

4.47.63.73.9

7.410.0

.311.9

-. 96.0

.3-6.2-9.8

4.5

6.519.4

-86.3

4.4

110.46.7

2.880.3

1.3113.568.606.631.97

6402.34.83.01.63.8

9.47.3

-212.7-1.7

-60.2

6532.45232.1

7.57.26.98.1

4.615.43.62.4

22.124.9

14.2

31.0

20.516.2

.1-4.7-3.53.1

13.417.8

-84.1

8.8

110.96.5

6.781.5

1.4814.55

8.957.081.87

6530.68.37.85.84.1

31.17.7

-201.86.2

-51.7

6623.7 6704.75273.1 5305.2

3.23.82.44.1

2.5

1.9

.93.6

11.013.5

3.49.6

1.86.8

-1.6-7.6

-10.82.0

23.725.7

-93.1

5.7

111.46.5

8.082.5

1.3715.259.287.341.94

6623.65.84.82.04.0

-10.97.4

-168.7.6

-57.1

2.53.22.94.2

2.01.13.51.4

13.0

15.65.4

14 .4

4.810.0

1.0-2.7-4.13.1

18.118.5

-103.1

5.0

112.06.6

3.082.6

1.5214.769.027.171.85

6701.14.87.11.53.8

5.67.4

-134.11.8

-55.6

6787.05340.2

2.73.32.43.5

2.42.62.02.5

9.810.96.72.9

6.410.9

1.0-2.6-4.03.1

21.820.8

-112.4

5.0

112.66.8

2.882.6

1.4514.879.057.201.85

6785.15.14.33.04.0

9.07.4

-142.23.2

-53.9

6864.85371.9

2.42.92.03.0

2.42.72.02.5

8.99.95.9

-3.7

7.210.0

.2-3.3-5.02.2

26.724.9

-119.3

4.7

113.16.6

2.782.7

1.4414.979.087.231.85

6857.54.35.82.64.1

1.77.4

-153.43.2

-53.6

6950.85402.4

2.32.62.33.0

2.22.62.02.3

9.010.15.8-2.2

7.28.4

.2-3.2-4.92.1

27.225.1

-123.5

5.1

113.66.6

3.082.7

1.4415.099.147.281.86

6945.55.26.63.24.3

7.07.4

-153.55.7

-50.8

7029.45433.6

2.32.72.33.1

2.22.42.02.3

9.010.0

5.7-.2

7.39.5

.7-2.9-4.62.6

27.825.4

-129.6

4.6

114.06.6

3.082.7

1.4415.219.197.331.86

7019.94.44.7-.13.7

4.57.4

-123.74.7

-51.5

7105.3 7181.25465.3 5497.3

2.4 2.42.8 2.62.3 2.53.1 3.1

2.1 2.12.3 2.31.9 1.92.2 2.2

9.1 9.310.0 10.06.1 7.2-. 5 -. 3

8.0 8.410.0 9.2

.8-2.8-4.52.7

29.226.6

-135.8

4.4

114.46.6

3.082.7

1.4415.359.267.381.88

7098.34.54.63.34.0

2.47.4

-136.510.0

-45.9

.9-2.5-4.22.7

27.725.0

-140.1

4.3

114.76.6

3.082.7

1.4415.479.317.431.88

7169.94.15.32.44.1

4.67.4

-151.39.5

-46.1

1.5 1.2 2.5 2.5 2.3 2.2 2.8 2.2 2.0 1.92.1 2.3 2.9 2.9 2.8 2.8 3.4 2.8 2.7 2.7

6.1 .92.8 4.0

-3.1 3.0

.9 1.03.5 3.92.6 2.9

1. Not at an annual rate. 2. Private-industry workers.1. Not at an annual rate. 2. Private-industry workers.

Strictly Confidential (FR)Class II FOMC

NET CHANGES IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS1

(Billions of 1987 dollars) March 16, 1994

1991 1992 1993

Item Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 1990 1991 1992 1993

Real GDPGross domestic purchases

Final sales

Private dom. final purch.

Personal cons. expend.DurablesNondurablesServices

Business fixed invest.

Producers' dur. equip.Nonres. structures

Res. structures

Change in bus. invent.NonfarmFarm

Net exportsExportsImports

Government purchasesFederal

DefenseNondefense

State and local

-29.4 17.8 17.0 7.0 42.4 34.5 41.7 70.1 9.9 23.9-44.6 9.6 28.6 -1.6 41.1 57.4 46.2 66.4 31.0 39.3

-32.8 22.8 -4.5 -1.0 54.4 16.9 44.8 71.0 -10.7 40.2-54.5 11.1 11.9 1.8 46.3 42.1 39.8 70.6 26.0 45.7

14.2 10.2 .4 34.8 14.5 34.1 46.3 6.6 28.91.7 10.6 -1.1 15.1 .9 11.5 14.4 -1.5 12.32.9 -1.8 -5.3 8.0 3.0 7.9 18.9 -5.8 7.19.6 1.4 6.8 11.7 10.6 14.7 13.0 13.9 9.5

-3.6 -5.0 -6.7 4.4 18.3 5.0 9.9.1 4.6 -2.0 2.5 18.2 9.2 10.6

-3.8 -9.6 -4.6 1.8 .1 -4.1 -.8.5 6.7 8.1 7.1 9.4 .6 14.4

18.6 22.018.4 19.1

.2 2.9

.8 -5.2

-4.9 21.4 8.0 -12.1 17.6 -3.0 -.9 20.6 -16.3-7.5 26.2 10.3 -19.9 16.6 -1.2 1.7 21.8 -12.22.5 -4.7 -2.3 7.8 1.0 -1.8 -2.6 -1.2 -4.1

8.3 -11.723.5 4.015.2 15.7

-4.7-7.0-9.32.32.3

8.6 1.2 -22.817.3 6.8 -. 88.8 5.5 22.0

-11.4-14.5-14.5

.03.1

-4.5 3.7 -21.19.1 12.3 -3.6

13.6 8.5 17.6

6.9

.0

-3.7

3.7

6.9

-15.6-16.1-15.3

-. 9.5

-15.35.2

20.5

9.81.8.4

1.57.9

10.5 12.4 188.7 163.8-20.1 -8.0 211.1 209.1

56.2 -15.5 187.1 159.1-4.2 -29.7 198.8 209.3

23.9 1.6-3.6 -1.7-1.4 -13.528.9 16.8

3.510.5-7.0

-31.7

-34.1-12.2-21.8

2.8

129.741.937.850.0

111.437.720.952.8

37.6 81.540.5 73.3

-3.0 8.331.5 16.3

-45.8 28,0 1.6 4.7-49.9 29.0 -2.8 10.3

4.2 -1.1 4.4 -5.6

30.6 20.4 -22.4 -45.332.7 43.8 27.4 28.52.2 23.5 49.6 73.9

29.810.44.26.1

19.3

-6.2-14.4-20.8

6.48.3

10.71.6-3.65.29.1

-4.9-24.2-23.3

-. 919.3

1. Annual changes are from Q4 to Q4.

-23.2-12.9-9.3

-1.0

-18.8-14.9-3.8

-12.5

3.5.0

3.4

15.2-1.0

-16.2

6.57.36.3

1.0-.7

Strictly Confidential (FR)Class II FOMC

NET CHANGES IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS1

(Billions of 1987 dollars)

Projected

1993 1994 1995 Projected

Item Q3 Q4 Q1 02 Q3 Q4 Q1 Q2 Q3 Q4 1992 1993 1994 1995

Real GDPGross domestic purchases

Final salesPrivate dom. final purch.

Personal cons. expend.DurablesNondurablesServices

Business fixed invest.Producers' dur. equip.

Nonres. structuresRes. structures

Change in bus. invent.NonfarmFarm

Net exportsExportsImports

Government purchasesFederal

Defense

NondefenseState and local

36.2 93.8 41.0 32.1 34.9 31.7 30.5 31.2 31.7 32.047.2 91.6 50.0 42.1 44.2 38.6 34.7 37.3 37.9 36.3

42.7 86.9 30.7 37.7 31.3 26.9 29.9 30.6 30.3 33.553.2 84.4 43.6 45.4 38.2 33.2 33.8 35.2 34.7 35.6

36.9 39.0 22.0 17.5 20.7 20.9 20.0 19.9 19.1 19.28.9 18.0 2.4 1.4 3.3 3.4 3.3 3.2 3.0 3.09.9 9.7 2.5 9.6 5.5 5.6 5.6 5.6 5.4 5.418.1 11.3 17.1 6.5 11.9 12.0 11.1 11.1 10.7 10.8

10.5 30.4 16.5 19.9 15.7 14.6 15.1 15.4 15.9 16.610.4 25.4 15.1 17.8 13.1 12.2 12.8 13.1 13.4 13.6

.1 5.1 1.3 2.1 2.6 2.3 2.3 2.3 2.5 3.05.9 14.8 5.3 7.9 1.7 -2.3 -1.4 -.1 -.3 -.2

-6.5 6.9 10.3 -5.6 3.72.3 -1.6 7.9 -7.2 2.3-8.8 8.5 2.4 1.6 1.4

-11.1-1.39.8

.6-5.7-6.3

.76.4

2.2 -9.0 -10.028.2 2.7 7.326.0 11.7 17.3

.3-4.2-2.1-2.2

4.5

-1.5-1.6

.1

-9.3 -6.8 -4.2 -6.1 -6.2 -4.3

9.9 11.2 11.4 11.9 13.1 14.019.2 18.1 15.7 18.0 19.4 18.3

-3.9-6.8-6.7

-. 12.9

1.6-2.4-2.6

.24.0

1.8-2.3-2.5

.24.1

2.1-2.1-2.3

.24.2

188.7 163.8 139.8 125.4211.1 209.1 175.0 146.2

187.1 159.1 126.5 124.3198.8 209.3 160.4 139.3

129.741.937.8

50.0

37.640.5-3.031.5

1.6-2.84.4

-22.427.449.6

10.7

1.6-3.65.29.1

111.4

37.720.952.8

81.573.38.3

16.3

4.710.3-5.6

-45.328.573.9

-4.9

-24.2-23.3

-. 919.3

81.2 78.210.6 12.523.2 22.047.3 43.7

66.658.28.3

12.7

13.37.16.2

-35.231.166.2

1.3-14.1-14.3

.215.4

63.052.910.2-2.0

1.1.2.9

-20.850.471.2

5.9-9.5

-10.2.7

15.4

1. Annual changes are from Q4 to Q4.

March 16, 1994

Strictly Confidential (FR)Class II FOMC

STAFF PROJECTIONS OF FEDERAL SECTOR ACCOUNTS AND RELATED ITEMS(Billions of dollars except as noted)

Fiscal year 1993 1994 1995

Item 1992a

1993a

1994 1995 Q1 Q2a Q3a

Q4 b Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

UNIFIED BUDGET Not seasonally adjusted

Receipts1

1090 1153 1255 1318 262 331 295 287 284 372 313 297 289 404 327 310Outlays1 1381 1408 1476 1525 324 349 349 379 350 371 375 378 386 378 382 397Surplus/deficit1 -290 -255 -221 -207 -62 -18 -54 -92 -67 0 -62 -81 -97 26 -55 -87

On-budget -340 -301 -278 -268 -90 -49 -54 -105 -75 -33 -65 -88 -108 -11 -61 -93Off-budget 50 46 58 62 27 31 0 13 9 33 3 7 11 38 6 6

Surplus excludingdeposit insurance

2 -287 -282 -226 -216 -68 -25 -61 -92 -73 2 -63 -82 -101 25 -59 -88

Means of financingBorrowing 311 249 224 201 60 61 46 89 38 15 81 59 81 15 46 70Cash decrease -17 6 -7 0 8 -39 8 3 25 -14 -21 20 20 -40 0 20Other

3 -4 0 4 6 -6 -4 0 0 4 -2 3 2 -4 -1 9 -4

Cash operating balance,end of period 59 53 60 60 22 61 53 50 25 39 60 40 20 60 60 40

NIPA FEDERAL SECTOR Seasonally adjusted, annual rate

Receipts 1163 1246 1364 1444 1218 1268 1276 1318 1353 1396 1389 1407 1432 1472 1466 1484Expenditures 1435 1487 1526 1586 1482 1491 1489 1520 1521 1530 1532 1561 1585 1596 1603 1635

Purchases 445 447 439 439 443 448 444 441 439 438 438 436 441 440 439 438Defense 313 308 297 292 305 308 302 300 297 295 294 292 293 292 290 289Nondefense 132 139 142 147 138 140 142 140 142 143 144 144 147 148 149 149

Other expenditures 990 1040 1087 1147 1039 1043 1045 1080 1082 1092 1094 1125 1145 1156 1164 1197Surplus/deficit -271 -241 -162 -142 -264 -223 -213 -202 -169 -134 -142 -153 -154 -124 -137 -151

FISCAL INDICATORS4

High-employment (HEB)surplus/deficit -212 -193 -142 -127 -215 -173 -165 -174 -150 -118 -127 -139 -139 -108 -121 -135

Change in HEB, percentof potential GDP .9 -. 3 -.8 -. 2 0 -. 7 -. 1 .1 -.4 -. 5 .1 .2 0 -.4 .2 .2

Fiscal impetus (FI),percent, cal. year -4.5 -4.5 -6.9 -5 -4.9 1.3 -. 8 -1.3 -3.3 -2.9 -.5 -1 -1.9 -1.6 -. 1 -. 7

1. OMB's February 1994 deficit estimates are $235 billion in FY94 and $176 billion in FY95(excluding health reform). CBO's January 1994 deficitestimates of the budget are $223 billion in FY94 and $171 billion in FY95. Budget receipts, outlays, and surplus/deficit includecorresponding social security (OASDI) categories. The OASDI surplus is excluded from the on-budget deficit and shown separately as off-budget, as classified under current law. The Postal Service deficit is included in off-budget outlays beginning in FY90.

2. OMB's February 1994 deficit estimates, excluding deposit insurance spending, are $238 billion in FY94 and $187 billionin FY95. CBO's January 1994 deficit estimates, excluding deposit insurance spending, are $228 billion in FY94, and $182 billion in FY95.

3. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities.

4. HEB is the NIPA measure in current dollars, with cyclically sensitive receipts and outlays adjusted to the level of potential output generatedby 2.4 percent real growth and an associated unemployment rate of 6 percent. Quarterly figures for change in HEB and FI are not at annual rates.Change in HEB, as a percent of nominal potential GDP, is reversed in sign. FI is the weighted difference of discretionary changes in federalspending and taxes (in 1987 dollars), scaled by real federal purchases. For change in HEB and FI, negative values indicate restraint.

a--Actual.b--Unified and NIPA data are actuals except for NIPA corporate profit tax total which is a staff projection.

March 17, 1994

DOMESTIC FINANCIAL DEVELOPMENTS

Recent Developments

Since the System's tightening on February 4, inflation fears,

trade tensions, and political uncertainty have cast a cloud over

money and capital markets. With further policy moves expected,

short-term interest rates have increased considerably more than the

25 basis point increase in the federal funds rate and, for some

instruments, are up as much as 60 basis points. Intermediate- and

long-term interest rates have risen 45 to 75 basis points. At

times, upward pressure on long-term rates appears to have been

intensified by sales of bonds by hedge and mutual funds.

Major stock price indexes declined sharply on February 4.

Since then, the Dow Jones Industrial and S&P 500 indexes have

decreased a bit further, while the NASDAQ index has retraced all of

its lost ground on strength in technology and small company stocks.

Many interest-sensitive stocks, including those of banks thought to

have incurred large trading losses in foreign financial markets,

have recorded sizable declines.

After registering modest gains in January, both M2 and M3

declined in February. M2 posted a decrease of 1 percent, in part

reflecting the falloff in mortgage refinancings in recent months and

perhaps an increase in the opportunity cost of M2-type money funds.

The weakness in M2 was exacerbated at the M3 level by sharp runoffs

in large time deposits at banks and thrifts and by outflows from

institutional money funds. For the month, M3 fell at a nearly 8

percent rate. Data available for early March point toward a rebound

in the broad aggregates. Meanwhile, household investments in long-

term mutual funds are reported to have moderated in February, and

bond funds apparently experienced outflows in early March.

I-21

I-22

Bank credit grew at a 5-3/4 percent rate in February, down

slightly from its rate of expansion in January. However, growth in

the past two months was exaggerated by a new accounting standard

that boosted reported holdings of certain securities. Actually,

reported investments in government securities were about flat in

February, likely because of both lower market valuations and efforts

of banks to limit securities investments in response to the recent

runup in interest rates. Business loans expanded in February for

the second straight month, albeit at a slower rate than that in

January. Growth in consumer loans was brisk last month but,

adjusted for securitizations, was a bit below the pace recorded over

the latter half of 1993. After weakening some in January, real

estate loans contracted last month.

Increases in interest rates and unsettled market conditions led

to the postponement of several bond offerings by nonfinancial

corporations in February and March, which in turn contributed to a

decline in gross public issuance. Corporate borrowers also

responded by shifting toward shorter-term maturities. Similarly, in

the commercial paper market, resistance of investors to longer-dated

paper forced issuers to shorten maturities. Buoyed by a pickup in

initial public offerings, gross public issuance of equity by

nonfinancial corporations rose in February. Despite the increase,

the average monthly issuance thus far in 1994 is significantly below

that in 1993. The slowdown in equity issuance during the current

quarter, coupled with the sizable cash payment to shareholders in

Viacom's purchase of Paramount, likely has turned net equity

issuance negative for the first time since 1991.

In the municipal bond market, gross issuance of tax-exempt

bonds declined in February to its lowest level in more than two

years, as higher interest rates contributed to a sharp drop in

I-23

refunding volume. Even without the backup in rates, refunding

issuance would likely have fallen because the hefty volume of

refundings over the past two years has depleted the stock of

outstanding bonds eligible to be refunded in advance of the first

call date. Owing to the diminished contribution of advance

refundings, net borrowing of state and local government units has

slowed in the past two months.

In the household sector, net borrowing appears to be strong

this quarter. Consumer installment debt continued to expand rapidly

in January despite disruptions in spending from the severe winter

weather and the California earthquake. Incoming information

suggests that net mortgage borrowing has remained strong even as

housing activity has slowed. Part of recent mortgage borrowing

likely reflects the high level of home buying around year-end that

resulted in the closing of loans in January and February. With the

increase in interest rates in February, refinancing loan

applications picked up somewhat as some homeowners availed

themselves of the "last" opportunity to lock in relatively low

mortgage rates. By the end of the month, however, refinancing

applications were back on the downward path evident since last fall.

Net borrowing to finance multifamily and commercial properties

turned positive in the fourth quarter for the first time in nearly

two years, perhaps pointing toward improvement in these two sectors

of the real estate market in coming quarters. In this regard, life

insurance companies, one of the principal sources of commercial real

estate loans, have reportedly become more willing lenders, after

recording stronger profits and capital growth last year and after

experiencing improved performance in existing loans.

The Treasury is raising a smaller volume of funds through open

market borrowing this quarter, partly in reflection of a lower

I-24

deficit. It is also drawing down its cash balance at a rapid clip

in anticipation of stronger receipts next quarter. In the current

quarter, the Treasury is raising a sizable sum in the coupon market

and is reducing net borrowing by paying down bills.

Outlook

The staff's economic outlook assumes some further firming in

money market conditions into 1995, as the System moves to keep

inflationary pressures at bay. In contrast, long-term interest

rates are expected to retreat some from current elevated levels in

the months ahead and to remain around these lower levels as the

recent intense selling pressure in bond markets abates and as market

participants become more confident that the economy has settled into

a moderate growth path with no pickup in inflationary pressures.

Debt growth of the nonfederal sectors--households, state and

local governments, and nonfinancial businesses--is projected to be 5

percent in 1994 and 4-3/4 percent in 1995, moderating slightly from

recent quarterly growth rates. Both household and municipal debt

are expected to slow a bit, whereas business debt growth edges up.

In the household sector, growth in consumer credit, while

starting off fairly strongly in the first quarter of this year,

declines over the next two years, partly reflecting a gradual

deceleration in spending on durable goods. In addition, an

expanding flow of repayments resulting from the heavier borrowing

activity in 1993 and 1994 is likely to restrain overall consumer

credit growth. Home mortgage debt, bolstered by continued strength

in housing demand, should grow briskly during the first half of 1994

but then slow with the leveling off in housing activity.

Debt of nonfinancial businesses is projected to grow around 2-

3/4 percent in 1994 and 3 percent in 1995, up from 1 percent last

year but still slow by historical standards. The step-up in debt

I-25

growth partly reflects our expectation of improvement in the

commercial real estate market that shows through to borrowing by

real estate partnerships. In addition, nonfinancial corporations

face a growing need for external funds to finance increases in

capital spending. The bulk of the external need will be met through

borrowing. Net equity issuance falls off from the levels of the

previous two years partly because mergers appear likely to involve

more competitive bids and hostile takeovers, which in turn often

lead to the use of cash rather equity as the means of payment.

Furthermore, banks and debt markets seem willing to provide the

financing for cash transactions.

We expect banks, finance companies, and the commercial paper

market collectively to provide a greater share of corporate

financing over the projection period. The corporate bond market

continues to be a significant source of funds, but over the course

of the projection period longer-term financing probably will be less

attractive as bond rates remain above their 1993 lows. Also, many

corporations have reportedly reached, or even exceeded, targeted

long-term debt levels and thus are likely to take on more shorter-

term borrowing.

In the state and local government sector, debt growth should

slow through 1995, partly because of a decline in advance

refundings. In addition, the volume of tax-exempt bond retirements

will rise appreciably as a large quantity of previously advance

refunded bonds becomes callable. These two effects on state and

local borrowing more than offset an anticipated step-up in borrowing

to finance rising infrastructure spending.

With further reductions in the federal deficit expected to

lower growth in federal debt to around 6 percent in both 1994 and

1995, we project total debt growth of the domestic nonfinancial

I-26

sectors to be 5-1/4 percent this year and 5 percent next year. In

both years, total debt expands a bit more rapidly than nominal gross

domestic product.

Confidential FR Class IIMarch 17, 1994

CHANGE IN DEBT OF THE DOMESTIC NONFINANCIAL SECTORS 1

(Percent)

--------------------- Nonfederal---------------------

----- Households------ ------- MEMO--------State and Private

Federal Home Cons. local financial NominalTotal 2 govt. Total Total mtg. credit Business govt. assets GDP

Year

1981 9.7 11.6 9.3 7.5 7.0 4.8 11.9 5.2 10.3 9.31982 9.8 19.7 7.4 5.5 4.7 4.4 8.8 9.3 9.6 3.21983 11.9 18.9 10.1 11.1 10.8 12.6 9.3 9.7 12.4 11.01984 14.5 16.9 13.8 12.8 11.7 18.7 15.6 9.1 12.6 9.11985 15.5 16.5 15.2 15.3 13.2 15.8 12.1 31.3 12.1 7.0

1986 12.3 13.6 11.9 12.0 14.3 9.6 12.2 10.5 7.3 4.71987 9.5 8.0 9.9 12.4 14.9 5.0 7.1 13.4 8.4 8.01988 8.8 8.0 9.0 10.8 11.8 7.2 7.9 7.0 8.0 7.71989 7.8 7.0 8.0 9.0 10.2 6.7 7.0 8.4 5.0 6.01990 6.3 11.0 4.9 6.2 7.7 1.7 3.4 6.7 4.3 4.7

1991 4.4 11.1 2.4 4.7 6.7 -1.6 -0.9 7.2 -0.6 3.71992 5.2 10.9 3.3 5.7 6.6 1.2 0.1 6.4 0.9 6.71993 5.2 8.3 4.0 6.3 6.8 6.1 0.9 6.5 -1.3 5.51994 5.3 5.8 5.1 7.3 7.9 8.6 2.7 4.8 0.4 5.11995 5.1 6.0 4.8 6.6 7.1 6.9 2.9 4.1 0.7 4.6

Quarter (seasonally adjusted annual rates)

1993:1 3.4 7.5 2.0 3.3 4.2 2.4 -0.7 7.2 -5.3 4.42 5.7 11.1 3.8 5.3 6.1 2.8 1.3 6.8 0.8 4.33 4.8 5.5 4.5 7.9 7.8 7.4 0.7 5.1 -2.3 4.44 6.3 8.2 5.6 8.2 8.4 11.2 2.5 6.3 1.4 8.8

1994:1 5.0 4.3 5.3 7.7 8.2 8.7 2.6 4.7 0.4 5.72 5.0 5.0 5.0 7.0 7.8 8.4 2.7 5.1 -0.1 5.03 6.1 9.2 5.0 7.0 7.5 8.2 2.8 4.5 0.9 5.04 4.7 4.2 4.9 6.7 7.2 7.9 2.8 4.6 0.5 4.7

1995:1 5.9 8.9 4.7 6.6 7.0 7.1 2.8 4.1 1.1 5.12 4.7 4.8 4.7 6.5 6.9 6.9 2.8 4.2 0.6 4.63 4.7 4.7 4.7 6.4 6.8 6.6 2.9 3.8 0.6 4.44 4.8 5.2 4.6 6.2 6.8 6.4 2.9 4.0 0.7 4.3

1. Data after 1993:4 are staff projections. Year-to-year changes in nominal GDP are measured from thefourth quarter of the preceding year to the fourth quarter of the year indicated; other changes aremeasured from end of preceding period to end of period indicated.

2. On a quarterly average basis, total debt growth is projected to be 5.5 in 1994 and 5.2 in 1995.

2.6.3 FOF

Confidential FR Class IIMarch 17, 1994

FLOW OF FUNDS PROJECTIONS: HIGHLIGHTS1

(Billions of dollars)

Calendar year1993- ----------- 1994----------- ----------- 1995-----------

1993 1994 1995 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

----------- Seasonally Adjusted Annual Rates-----------Net funds raised by domesticnonfinancial sectors

1 Total 629.5 670.4 680.7 795.0 613.8 645.3 803.7 618.9 778.6 640.8 642.5 661.12 Net equity issuance 23.0 15.5 15.0 28.0 -4.0 20.0 31.0 15.0 15.0 15.0 15.0 15.03 Net debt issuance 606.5 654.9 665.7 767.0 617.8 625.3 772.7 603.9 763.6 625.8 627.5 646.1

Borrowing sectorsNonfinancial business

4 Financing gap 2 21.9 76.3 107.6 24.9 49.8 76.5 84.0 94.7 99.6 104.3 112.1 114.55 Net equity issuance 23.0 15.5 15.0 28.0 -4.0 20.0 31.0 15.0 15.0 15.0 15.0 15.06 Credit market borrowing 34.5 102.0 109.4 93.2 97.3 100.0 104.0 106.6 105.9 107.0 111.6 113.2

Households7 Net borrowing, of which: 251.2 309.0 298.2 338.5 326.8 302.9 306.0 300.3 298.7 298.9 299.3 295.78 Home mortgages 187.0 233.0 223.8 242.1 242.0 235.0 230.0 225.0 222.0 223.0 224.0 226.09 Consumer credit 49.0 73.5 64.5 93.3 75.0 74.0 73.0 72.0 66.0 65.0 64.0 63.0

10 Debt/DPI (percent)3 87.2 88.4 89.7 87.8 88.7 89.1 89.3 89.6 89.7 90.6 90.7 90.9

State and local governments11 Net borrowing 64.7 50.8 45.5 65.7 49.6 54.6 48.5 50.5 45.5 47.5 43.5 45.512 Current surplus 4 -59.1 -61.5 -56.6 -65.1 -62.7 -61.4 -60.6 -61.3 -57.5 -59.1 -54.3 -55.4

U.S.government13 Net borrowing 256.1 193.2 212.7 269.6 144.1 167.9 314.1 146.6 313.6 172.3 173.1 191.714 Net borrowing;quarterly, nsa 256.1 193.2 212.7 89.2 38.3 15.2 80.8 58.9 80.6 15.2 46.4 70.515 Unified deficit;quarterly, nsa 226.3 209.5 212.7 92.1 66.7 -0.5 62.3 80.9 97.1 -26.2 55.0 86.9

Funds supplied by16 depository institutions 136.6 163.8 178.8 201.0 162.8 141.6 169.0 181.9 178.7 177.2 178.8 180.6

MEMO: (percent of GDP)17 Dom. nonfinancial debt 3 188.9 188.0 188.8 189.1 188.9 188.9 189.5 189.5 189.9 190.0 190.2 190.418 Dom. nonfinancial borrowing 9.5 9.7 9.4 11.7 9.3 9.3 11.4 8.8 11.0 8.9 8.8 9.019 U.S. government 5 4.0 2.9 3.0 4.1 2.2 2.5 4.6 2.1 4.5 2.5 2.4 2.720 Private 5.5 6.8 6.4 7.6 7.2 6.8 6.8 6.7 6.5 6.5 6.4 6.3

1. Data after 1993:4 are staff projections.2. For corporations: Excess of capital expenditures over U.S. internal funds.3. Annuals are average debt levels in the year (computed as the average of year-end debt positions) divided by nominal GDP.4. NIPA surplus, net of retirement funds.5. Excludes government-insured mortgage pool securities.

2.6.4 FOF

INTERNATIONAL DEVELOPMENTS

Recent Developments

The weighted-average foreign exchange value of the dollar in

terms of the other G-10 currencies has declined more than 1-1/4

percent from its level immediately preceding the February FOMC

meeting. On balance over the intermeeting period, the dollar

depreciated 2-1/2 percent against the mark and 2 percent against the

yen. The dollar declined despite the tightening of U.S. monetary

policy announced on February 4 and the subsequent releases of data

indicating generally strong U.S. economic activity. Factors

contributing to the downward pressure on the dollar included concern

over the breakdown of trade talks with Japan, disappointment over

the pace of monetary easing in Germany, and increased political

uncertainty in the United States.

On February 17 the Bundesbank announced a 50 basis point

reduction in its discount rate; however, subsequent RP operations

were conducted at rates cumulating to only 12 basis points lower

than the rate that had prevailed since early December. Short-term

German market interest rates were unchanged over the period.

However, short-term rates in other European countries declined 5 to

45 basis points as central banks in several countries lowered

official lending rates following the Bundesbank action. Short-term

rates moved up 30 basis points in Canada and 50 basis points in the

United States. Bond yields in every major country moved higher over

the intermeeting period in frequently volatile trading: The weighted

average of foreign long-term bond yields rose nearly 60 basis points

on balance, a bit less than yields on comparable U.S. bonds.

I-29

I-30

U.S. authorities did not intervene in either marks or yen, but the

Desk did sell a little over $400 million equivalent of Belgian and

Swiss francs as part of the program to liquidate System balances of

currencies other than marks and yen.

The pace of economic activity in Japan appears to have revived

somewhat after weakening further in the fourth quarter. Industrial

production rose in January, partly reversing its December decline,

while machinery orders increased further. In western Germany,

industrial production was unchanged in January from December but was

above its fourth-quarter average. Limited indicators for France

suggest some recovery in January, while economic activity in Canada

and the United Kingdom continued to expand. In recent months,

unemployment rates edged down in Canada, the United Kingdom, and

Japan, while remaining stubbornly high in France and continuing to

rise in Germany and Italy. Through February, Japanese twelve-month

consumer price inflation remained about 1-1/4 percent while German

inflation has improved slightly since the end of last year, to 3-1/4

percent.

The U.S. merchandise trade deficit fell to $7.4 billion

(seasonally adjusted, Census basis) in December, the smallest

deficit in a year. Exports rose sharply, in part because of a

bunching of aircraft deliveries, while imports declined somewhat.

On average for the fourth quarter, both exports and imports rose

well above third-quarter levels, with the deficit narrowing.

Prices of U.S. nonagricultural exports and non-oil imports rose

moderately in January. Since the last Greenbook, oil prices (spot

West Texas Intermediate (WTI)) have fallen $0.60 per barrel. The

drop in prices following the conclusion of the early March Gulf

I-31

Cooperation Council meeting accounted for most of the decline. OPEC

ministers are scheduled to meet March 25 in Geneva.

Outlook

The staff projects that the growth of real GDP in foreign

industrial and developing countries will rise to 2-3/4 percent this

year and then to 3-1/2 percent next year. Given this path and the

assumption that the dollar will remain about unchanged from recent

levels, we expect imports to continue to grow faster than exports.

The resulting decline in real net exports of goods and services will

subtract 2/3 percentage point from the annual rate of growth of real

GDP during 1994. The decline in net exports should slow in 1995 as

the growth of foreign GDP rises above that of U.S. growth.

The dollar. We project that the foreign exchange value of the

dollar in terms of the other G-10 currencies will remain near its

recent level throughout the forecast period. This projected level

is unchanged from that in the January Greenbook and somewhat above

its current level. Against the currencies of key developing

countries, we expect the CPI-adjusted value of the dollar to show a

moderate depreciation on average through the end of the forecast

period.

Foreign industrial countries. We project the growth of real

GDP in the G-6 countries (weighted by U.S. exports) to strengthen

over the course of 1994 and into 1995, reaching about 2-1/4 percent

this year and more than 3 percent next year. Compared to the

January Greenbook, outlooks for France and Canada are slightly

stronger.

1. Starting with this Greenbook, the staff forecast for Germany will befor all of Germany on a unified basis. This change raises the G-6weighted average growth rate over the forecast period, especially in1994, compared with the previous Greenbook. The forecast for west GermanGDP is essentially unchanged.

I-32

Japanese real GDP growth is expected to remain near 1 percent

during the first half of this year, to strengthen slightly during

the second half, and to reach about 2-3/4 percent next year. German

output growth is expected to turn positive during the second quarter

and to average about 2 percent during the second half of the year:

growth of about 2-1/4 percent is expected in 1995. In France and

Italy, the pace of activity is expected to be a bit stronger in the

very near term than in Germany, but the pattern of recovery over the

remainder of the forecast period is projected to be similar to that

in Germany. In the United Kingdom, output growth is expected to

continue at about 2-1/2 percent in 1994 and to rise slightly in

1995, while output growth in Canada is projected to rise from about

3 percent this year to nearly 4 percent next year.

With the pace of activity remaining moderate abroad, inflation

2is expected to decline further over the forecast period. Canadian

inflation is forecast to drop to less than 1/2 percent this year, in

part because of the sizeable reduction in cigarette taxes announced

in February. Consequently, projected average inflation for the G-6

countries decreases about 1/2 percentage point this year, to 1-1/2

percent (weighted by U.S. imports), and then rises slightly in 1995.

Although additional monetary easing is expected in several of

the major foreign industrial countries this year, the projected

paths of both short-term and long-term foreign interest rates have

been raised since the previous Greenbook. Foreign short-term rates,

on average, are projected to decline an additional 50 basis points

by the end of 1994. German rates should fall about 100 basis points

over this period, somewhat less than previously projected.

Bundesbank easing has slowed; statements by Bundesbank officials

2. G 6 consumer price inflation continues to be forecast using westGerman prices.

I-33

suggest that their cautious easing will continue, but the staff's

assessment is that it will not extend as far as we earlier thought

would be the case. The rapid growth in M3 in late 1993 and early

1994 has contributed to the Bundesbank's caution. Short-term rates

in most other European countries are projected to decline similar

amounts, except in the United Kingdom, where only a very small

further decline is projected. Short-term rates in Japan are also

expected to fall only slightly further, while in Canada rates are

projected to edge up from current levels. The path for foreign

long-term rates has been moved up in response to recent increases in

rates, but, on average, long-term rates are still expected to

decline moderately over the forecast period.

Developing countries. Real GDP of developing countries that

are major U.S. trading partners is estimated to have increased about

4-1/4 percent in 1993 (weighted by bilateral nonagricultural export

shares), and is forecast to increase 4-1/4 percent in 1994 and 4-3/4

percent in 1995. Asia is expected to achieve much stronger growth

than the rest of the developing world in 1994-95. Rapid

technological development associated with high investment rates in

many Asian countries and a continued expansion of intra-Asian trade,

especially with China, should allow for strong growth in 1994-95.

Recent ongoing financial market liberalization in certain Asian

countries (notably in Korea and Taiwan) and low interest rates

should contribute to strong investment demand in Asia in 1994-95.

The modest increase in developing country GDP over the 1994-95

forecast horizon is mainly attributable to a pickup in Mexican

growth following the passage of NAFTA and the implementation of more

stimulative macroeonomic policies. Stronger growth in the European

Union and in Japan in 1994-95 should also contribute to a slight

increase of growth in Asia.

I-34

U.S. real net exports. U.S. demand for imports is more

responsive to income growth than is foreign demand for U.S. exports.

Accordingly, with GDP in the United States growing at about the same

rate as abroad in 1994, we expect that real net exports of goods and

services will decline about $35 billion over the four quarters of

1994. During 1995, however, the pace of decline in net exports

should slow to about $20 billion as U.S. growth settles down to

potential amid a further pickup in the rest of the world.

TRADE QUANTITIES(Q4/Q4 percent change)

--Projection---1992 1993 1994 1995

Merchandise exportsTotal 6.5 5.9 5.5 8.6

Agricultural 8.7 -4.9 -2.8 2.5Computers 26.7 19.9 30.4 34.8Other nonag. 3.4 4.9 1.7 2.9

Merchandise importsTotal 10.1 12.9 10.5 10.3

Oil 12.1 10.8 4.8 4.4Computers 46.7 35.2 33.6 31.1Other non oil 5.5 9.5 6.5 5.7

* GDP basis, 1987 dollars.

The quantity of merchandise exports is projected to grow

moderately over the remainder of this year and to accelerate in

1995. Growth in the current quarter will be limited following the

surge in the fourth quarter of last year. Exports of computers are

projected to strengthen significantly this year relative to last and

to rise somewhat further in 1995. After the first quarter of this

year, other nonagricultural exports are projected to advance at

about a 3 percent annual rate through the forecast period. The

stimulating effect of increasing growth abroad will be partly offset

by the depressing effect of the appreciation of the dollar over the

past year or so. The relatively poor U.S. harvest in 1993 is

I-35

expected to limit agricultural exports this year; positive growth in

these exports is expected to resume late this year.

Non-oil imports should grow at about 10 percent (annual rate)

over the remainder of this year and next. Computer imports continue

to outpace computer exports in the near term, but growth of these

imports levels off in 1995 as investment expenditure in the United

States slows.

We expect that the quantity of oil imports will decline in the

current quarter as domestic stocks are drawn down at a fairly rapid

pace. Imports will remain about unchanged in the second quarter,

given the usual seasonal drop-off in consumption. Over the

remainder of the forecast period, imports are projected to resume an

upward trend as U.S. oil production continues to decline in response

to a relatively low real price of oil.

Oil prices. The weakness in the oil market has led us to mark

down the path of oil prices by an average of $0.70 per barrel

through the second quarter of 1994. We expect the spot price for

WTI crude to begin to rise soon, following an announcement of OPEC

production restraint at its upcoming meeting. The spot price for

WTI should reach $17.50 per barrel (a price consistent with an

import unit value of $15 per barrel) by June as global economic

activity picks up. Prices should remain at that level through 1995,

given our assumption that Iraq will return to the oil market in

early 1995. The staff assumption has oil prices rising more rapidly

to a higher level than is currently expected by the market; our

price assumption for most of the forecast period is about $1.50

above market expectations.

Prices of non-oil imports and exports. We expect that the

price of non-oil imports excluding computers will rise slightly more

than 1 percent this year and next, little changed from the increase

I-36

observed in 1993. Low inflation abroad continues to restrain these

prices. The increase in prices of U.S. nonagricultural exports

should, over time, move in line with increases in U.S. producer

prices.

SELECTED PRICE INDICATORS(Q4/Q4 percent change except as noted)

--Projection---1992 1993 1994 1995

PPI (export. wts.) 1.6 0.8 2.2 2.2Nonag. exports* 1.4 0.6 2.0 2.1Non-oil imports* 2.3 1.2 1.3 1.4Oil imports(Q4 level, $/bl.) 17.89 14.12 15.00 15.00

* Excluding computers.

Nominal trade and current account balances. The merchandise

trade deficit is projected to increase from about $135 billion

(a.r.) in the current quarter to about $170 billion by the end of

1994 and $190 billion by the end of 1995. Net service receipts will

continue to expand, from an annual rate of about $50 billion this

quarter to $65 billion by the end of 1995. Investment income

payments are expected to exceed investment income receipts by a

small but increasing margin over the forecast period. As a result

of these developments, we expect that the current account deficit

will rise to more than $175 billion by the end of 1995.

March 17, 1994

STRICTLY CONFIDENTIAL - FRCLASS II FOMC

REAL GDP AND CONSUMER PRICES, SELECTED COUNTRIES, 1991-95(Percent change from fourth quarter to fourth quarter)

Projection

Measure and country 1991 1992 1993 1994 1995

REAL GDP

Canada -0.1 0.8 3.0 3.1 3.8France 1.3 0.7 -0.1 1.3 2.5Germany 1.3 0.7 -0.5 1.3 2.2

W. Germany 2.7 0.0 -0.8 0.5 2.0Italy 1.7 -0.2 0.0 1.8 2.1Japan 3.6 -0.3 0.1 1.4 2.7United Kingdom -1.6 0.2 2.6 2.5 2.8

Average, weighted by 1987-89 GDP 1.5 0.2 0.6 1.7 2.6

Average, weighted by share ofU.S. nonagricultural exports

Total foreign 1.7 1.2 2.1 2.7 3.5G-6 0.7 0.4 1.7 2.3 3.2Developing countries 4.9 3.9 4.2 4.3 5.0

CONSUMER PRICES

Canada 4.1 1.8 1.8 0.3 1.6France 2.9 1.8 2.1 1.9 1.7Western Germany 3.9 3.7 3.7 2.7 2.1Italy 6.1 4.8 4.1 3.5 2.8Japan 3.2 0.9 1.2 1.0 0.8United Kingdom 4.2 3.1 1.6 3.3 3.5

Average, weighted by 1987-89 GDP 3.9 2.4 2.2 2.0 1.9

Average, weighted by share ofU.S. non-oil imports 1.9 1.3 1.63.8 1.9

Strictly Confidential (FR) Class II-FOMC

U.S. CURRENT ACCOUNT AND REAL NET EXPORTS

(Billions of dollars, seasonally adjusted annual rates)(Billions of dollars, seasonally adjusted annual rates)

GDP Net Exports ofGoods and Services (87$)

Exports of G+SMerchandiseServices

Imports of G+SMerchandise

OilNon-oil

Services

Memo:(Percent change 1/)

Exports of G+Sof which: Goods

Imports of G+Sof which: Non-oilGoods

Current Account Balance

Merchandise Trade, net

ExportsAgriculturalNonagricultural

ImportsOilNon-oil

1991

Q1 Q2 Q3 Q4

-21.6 -13.3 -25.0 -16.4

519.4 542.9 546.9 564.2381.6 396.1 398.2 410.7137.8 146.8 148.7 153.5

541.0 556.2 571.9 580.7442.1 457.2 474.6 481.744.7 52.0 52.9 47.1397.5 405.2 421.7 434.798.9 99.1 97.3 98.9

1992...........................

Q1 Q2 Q3 Q4

-15.2 -38.0 -42.5 -38.8

571.0 570.2 579 3 591.6414.4 415.9 423 0 437.3156.6 154.2 156.3 154.3

586.2 608.2 621.8 630.3486.8 509.0 521.6 530.347.3 51.6 53.1 52.8

439.6 457.4 468.5 477.699.3 99.2 100.1 100.0

1993

Q1 Q2

-59.9 -75.2

588.0 593.2430.2 434.5157.8 158.6

647.9 668.4545.9 565.7

53.4 57.8492.5 507.9102.0 102.7

ANNUAL

1990 1991 1992

-54.7 -19.1 -33.6

510.5 543.4 578.0368.9 396.7 422.7141.6 146.7 155 4

565.1 562.4 611.6461.4 463.9 511.952.1 49.2 51 2

409.3 414.8 460.8103.7 98.5 99.6

-0.8 19.4 3.0 13.3 4.9 -0.6 6.5 8.8 -2.4 3.6 6.8 8.7 4.97.7 16.1 2.1 13.2 3.7 1.5 7.0 14.2 -6.3 4.1 5.8 9.8 6.6

-11.1 11.7 11.8 6.3 3.8 15.9 9.2 5.6 11.6 13.3 0.6 4.7 8.6

-11.3 8.0 17.3 12.9 4.6 17.2 10.1 8.0 13.1 13.1 0.8 6.7 10.0

37.6 7.1 -47.4 -30.6 -26.7 -73.0 -71.1 -94.7 -89.5 -108.9 -91.9 -8.3 -66.4

-75.2 -65.3 -78.6 -76.2 -71.1 -99.2 -110.4 -103.8 -117.3 -137.6 -109.0 -73.8 -96.1

405.3 416.8 415.1 430.5 433.4 433.2 438.0 456.0 445.9 452.3 389.3 416.9 440.139.5 38.5 39.7 42.8 43.3 42.6 44.7 45.5 43.3 43.0 40.2 40.1 44 0

365.8 378.3 375.4 387.7 390.0 390.6 393.3 410.4 402.6 409.2 349.1 376.8 396.1

480.5 482.1 493.6 506.7 504.4 532.4 548.4 559.8 563.2 589.9 498.3 490.7 536 352.4 52.3 53.0 49.4 41.9 52.4 57.2 54.9 51.0 57.2 62.3 51.8 51.6

428.1 429.8 440.7 457.4 462.5 480.0 491.2 505.0 512.2 532.6 436.0 439.0 484.7

Other Current Account 89.7 60.7 24.6 34.8 26.6 22.6 32.5 12.3 28.2 28.8 -3.2 52.5 23.5

Invest. Income, net 23.1 11.6 6.5 10.9 17.7 3.6 6.8 -3.2 -0.4 -0.1 20.3 13.0 6.2Direct, net 60.3 52.8 45.1 52.8 57.6 47.6 47.1 40.8 44.9 46.5 56.2 52.8 48.3Portfolio, net -37.2 -41.1 -38.6 -42.0 -39.9 -44.0 -40.3 -44.0 -45.4 -46.6 -35.9 -39.7 -42.0

Military, net -10.1 -5.6 -4.7 -3.0 -2.3 -2.9 -2.5 -3.3 -0.6 -0.9 -7.8 -5.9 -2 8Other Services, net 43.4 50.8 55.6 57.2 58.5 57.5 63.6 57.1 59.2 58.9 38.5 51.7 59.2Transfers, net 56.4 15.5 -26.3 -19.4 -29.6 -32.0 -28.6 -41 4 -30.4 -29.2 -33 8 6.6 -32.9

1/ Percent change (AR) from previous period; percent changes for annual data are calculated Q4/Q4.

Strictly Confidential (FR) Class II-FOMC

OUTLOOK FOR U.S. CURRENT ACCOUNT AND REAL NET EXPORTS

(Billions of dollars, seasonally adjusted annual rates)

GDP Net Exports ofGoods and Services (87$)

Exports of G+SMerchandiseServices

Imports of G+SMerchandise

OilNon-oil

Services

Memo:(Percent change 1/)

Exports of G+Sof which: Goods

Imports of G+Sof which: Non-oilGoods

1993

Q3 Q4

-86.3 -84.1

591.9434.1157.8

678.2574.956.7

518.2103.3

-0.9-0.46.0

620.1463.1157.0

704.2598.958.5

540.4105.3

20.529.516.2

8.4 18.3

Proj------------------------------

1994

Q1 Q2 Q3 Q4

ection Projection-------------------------...... ------- ...

1995 ANNUAL

Q1 Q2 Q3 Q4 1993 1994 1995

-93.1 -103.1 -112.4 -119.3 -123.5 -129.6 -135.8 -140.1 -76.4 -107.0 -132.2

622.8465.1157.7

715.9610.056.8

553.2105.9

630.1471.1159.0

733.2626.457.1569.4106.8

1.8 4.81.7 5.36.8 10.0

640.0479.3160.6

752.4644.759.6

585.1107.7

6 47.2

10.9

9.8 12.2 11.5

651.2488.6162.6

770.4662.061.3

600.6108.5

7.27.9

10.0

662.6498.1164.6

786.1676.961.2

615.7109.2

674.5507.9166.5

804.1694.262.5

631.7109.9

687.6519.0168.7

823.4712.864.3648.5110.7

7.2 7.3 8.08.0 8.2 9.08.4 9.5 10.0

701.6530.8170.8

841.7730.364.0

666.2111.4

598.3440.5257.8

674.7571.356.6

514.7103.3

8.4 5.29.5 6.79.2 11.8

11.1 10.4 10,8 11.1 11.4

636.0476.0160.0

743.0635.858.7

577.1107.2

681.6513.9167.6

813.8703.563.0

640.5110.3

5.0 7.75.5 8.69.4 9.2

13.2 11.1 10.9

Current Account Balance -112.4 -126.2 -118.8 -134.9 -143.6 -162.5 -153.6 -161.0 -162.6 -177.9 -109.2 -140.0 -163.8

Merchandise Trade, net -143.9 -131.1 -136.3 -150.1 -162.0 -168,5 -172.2 -177.7 -183.8 -188.2 -132.5 -154 2 -180.5

ExportsAgriculturalNonagricultural

ImportsOilNon-oil

Other Current Account

Invest. Income, netDirect, netPortfolio, net

Military, netOther Services, netTransfers, net

447.742.3

405.4

591.650.1

541.5

481.145.3435.8

612.348.0

564.3

25.1 10.6

6.550.2

-43.7

-5.642.3

-47.9

472.644.1

428.5

608.940.8

568.1

474.744.2

430.5

624.945.6579.3

481.844.7

437.2

643.851.7

592.1

488.945.5

443.4

657.453.4

603.9

21.3 22.6 24.2 17.2

-3.842.9-46.7

-7.543.0-50.5

-5.843.5

-49.3

-11.243.3

-54.5

495.845 7

450 1

668.053.3

614.7

502 546.0

456.5

680.254.5

625.7

27.8 29.9

-9.244.1

-53.3

-13.344.6-57.9

509.446.5

462.9

693.256.0

637.3

516.446.9

469.6

704.655.8

648.8

32.1 25.5

-10.945.2

-56.1

-15.246.0

-61.2

456.843.5

413.3

589.251.6

537.7

479.544.6

434.9

633.747.9

585.9

506.046.3

459.8

686 554.9

631.6

23.2 21.3 28 8

0.146.0

-45.9

-7.143.2

-50.2

-0.5 -2.1 -1.6 -1.2 -0.8 -0.2 0.4 0.8 1.2 1.6 -1.0 -0.955.9 52.8 53.3 54.2 55.4 56.8 58.5 60.2 62.0 64.0 56.7 54.9-30.4 -40.1 -30.4 -30.4 -30.4 -39.4 -31.1 -31.1 -31.1 -40.1 -32.5 -32.6

......................................................................................-

-12.145.0

-57.1

1.061.2

-33.4

1/ Percent change (AR) from previous period; percent changes for annual data are calculated Q4/Q4.